BCA Weekly Commentary 12/17/21: Price Discovery Done For?


ECONOMIC IMPACT. As expected the Federal Reserve announced not only announced this week it will wind down additional bond purchases by March 2022 but also potentially raise rates 2-3 times next year. This may act to raise at least short term interest rates and slow asset price appreciation and the economy to control inflation. As we have been long saying economic growth may slow in 2022 much greater than what's expected especially in 2H22 as both now tighter monetary policy and inflation may act on this.


INVESTMENT IMPACT. The illusions & distortions of BOTH monetary and fiscal policy have acted to distort asset prices for several decades now. However, things currently maybe at an extreme in this respect. A multitude of large cap technology cos which command significant valuation premiums over the market overall and their smaller capitalization pears are reporting disappointing earnings (recently Amazon & Adobe to name a few). Despite this, many of these names are near their 52 week highs or way off lows which may demonstrate the influence on money printing on asset prices. Its widely speculated that more money printed flows into a multitude of assets one of which is LARGE CAP TECH artificially elevating asset prices beyond what is justified by their fundamentals. This may help explain the significant valuation differences and reactions to earnings disappointment's occurring. Moreover, since these large cap tech names dominate the indices they also may distort or falsely convey the health of fundamentals. Lastly, we remind clients that the use of ETFs when liquidation of assets is occurring (like now) exacerbates moves on stocks irrespective of their fundamentals. Simply put ETFs are groupings of stocks and when they get sold everything within the ETF gets sold.


Our model portfolio performance has been updated on our website as of 10/29/21.


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